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5 Ways to Invest Like Seth Klarman

Seth Klarman is a master of value investor.

He's spent his entire career studying, learning, and applying the lessons of value investing to help grow his billion dollar hedge fund Baupost Group. Here are 5 ways to invest like Klarman using quotes from his book (yes, it does cost almost $1,000) and several of his speeches:

1. On the hardest thing to do while investing: patience
"For years, when someone asked me what my biggest fear was as an investor in managing my portfolio, my answer was that it was buying too soon on the way down from often very overvalued levels... Sometimes being too early becomes indistinguishable from being wrong.

After a stock market has dropped 30%, there’s no way to tell how much further it might have to go. It’d be silly to expect every bear market to turn into the Great Depression. But it would be equally wrong to expect that a fall from overvalued to more fairly valued couldn’t badly overshoot on the downside."

2. The market is widely misunderstood: no one gets rich in one day

"Many unsuccessful investors regard the stock market as a way to make money without working rather than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to seek shortcuts to investment success.

Rather than allowing returns to compound over time, they attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could possibly be in possession of valuable information that is not illegally obtained or why, if it is so valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more subtly, as complacency in the face of bad news. Finally greed can cause investors to shift their focus away from the achievement of long-term investment goals in favor of short-term speculation."

3. What all investors must understand: crashes happen
"The future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall. Investors intent on avoiding loss consequently must position themselves to survey and even prosper under any circumstances.

Bad luck can befall you; mistakes happen. The river may overflow its banks only once or twice in a century, but you still buy flood insurance on your house each year. Similarly we may only have one or two economic depressions or financial panics in a century and hyperinflation may never ruin the U.S. economy, but the prudent, farsighted investor manages his or her portfolio with the knowledge that financial catastrophes can and do occur. Investors must be willing to forego some near-term return, if necessary, as an insurance premium against unexpected and unpredictable adversity."

4. The motto of value investing: stay the course
"The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking.

A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation. Yet over the long run the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it."

5. Why balance and awareness are so important: avoid arrogance
"You need to balance arrogance and humility. When you buy anything it's an arrogant act. You're saying to markets, which are gyrating and moving, that somebody wants to sell this to me and I know more than everyone else so I'm going to stand here and buy it. That's arrogant. You need humility to say 'I might be wrong.'"